Investors are clearly grumpy after
minutes from the last Federal Reserve monetary policy meeting, in March, suggested that the central bank is less inclined to introduce another round of stimulus as long as the economy is performing okay. The Dow Jones industrial average slumped on Tuesday, after the minutes were released. The blue-chip index was down another 1.1 per cent on Wednesday in midday trading, though partly in reaction to gloom from Europe.

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The problem, according to Ed Yardeni, of Yardeni Research, is that stock investors “have become junkies for the Fed’s easing programs.”

His numbers back up the claim, with stocks showing impressive gains whenever the Fed introduced programs to hold bond yields down. Since the Fed implemented the so-called “Operation Twist” program (shifting out of short-term bonds and into longer-term bonds) on Sept. 21, 2011, the S&P 500 has risen 21 per cent. During the first round of quantitative easing (essentially printing money to buy government bonds) between November 2008 and March 2010, the S&P 500 rose 36 per cent. And during the second round of quantitative easing, or QE2, it rose 24 per cent.

So the question naturally arises: Can stocks rise without another round of Fed tinkering?

Mr. Yardeni believes it can. Previously, stocks rose with Fed help because the economic backdrop was either weak or deeply troubled. More recently, though, the U.S. economy has been delivering some impressive results, and Mr. Yardini believes it is now showing signs of what he calls “self-sustaining” growth.